If 2011 was a year of uncertainty and a massive early August crash that helped hold down equities for the year, the first two months of 2012 seemed to indicate that times have changed. Those hoping for an extended Bull Market, though, may have been greatly disheartened on Tuesday when the Dow Jones Industrial Average came crashing back to reality with a 203 point decline.
The Dow lost 1.57 percent at day's end, with the S&P off 1.54 percent, and the Nasdaq finishing down 1.36 percent. This brought to an end a 45-day streak in which the Dow never showed a triple digit loss, the longest such streak since November of 2006.
"It was almost like investors were lulled to sleep. We were led to believe there are no problems," says Hugh Johnson of Johnson Illington Advisors. "But now we've been reminded there are problems."
The rollback on Tuesday is likely to further spark the debate of whether or not the Bull Market can continue throughout 2012. On the one hand you have positive economic data driving equities higher, with the belief that falling unemployment and an economy finally waking up from a five-year slumber will help drive the market higher. On the other side, concerns about important overseas economies and rising crude prices have some believing that the gains of January and February are due to be erased.
Why the Bull Market Will Hold
The primary factor driving people's belief that equities will continue to gain value over the course of the year comes from the belief that the American economy is finally turning around. Unemployment has fallen for five straight months and projections from economists appear to indicate that this trend will continue.
An AP survey conducted late last month of 24 leading economists now projects that unemployment will fall to 8 percent by the November election and 7.4 percent by the end of 2013. Both are downward revisions of the previous predictions of 8.3 percent and 7.8 percent respectively. The same economists also predicted that American consumers will start saving less and borrowing more, and projected that the US economy will grow by 2.5 percent, up from previous projections of 2.4 percent and much higher than 2011's figure of 1.7 percent.
Unemployment, though, represents just one of the factors in play. While rarely making big swings, economic data has been gradually improving and improving faster than most analysts had predicted. Monday brought more strong news as US Treasury bills declined in prices on news of two new positive reports.
The Institute for Supply Management showed that the nation's service companies expanded in February at the fastest rate in a year, boosted by increased orders and hiring, and that non-manufacturing activity increased for the third straight month. Another report showed that factory orders declined much less in January than analyst expectations. Economists surveyed by FactSet had projected a 1.5 percent decline in factory orders, but January saw only a 1 percent decline, supporting the belief by many of a overall positive trend in the longer term.
An economic recovery, even one as slow and subdued as predicted, would appear to boost the equities market which many believe is still depressed from the financial crisis. One indicator that the market could continue to rise may come from shifts in the way pension plans are being accounted for by several major companies. Companies like UPS (UPS), IBM (IBM), AT&T (T), and Intel (INTC) have all shifted their valuable pension plans to a mark-to-market system of accounting that essentially breaks down to a bet on equities markets continuing to improve.
Why the Bull Market Won't Hold
"The new reality is that we've priced in a lot of the good news, and what we're left with is a pretty sluggish global-recovery picture," said David Joy chief market strategist at Ameriprise Financial (AMP). "A pullback is completely understandable and probably overdue."
However, for all the positive news about the American economy, there remain some serious headwinds facing markets in the relatively near future. Most notably, the economies of Europe and China appear to be headed in the wrong direction, a trend that could hurt the global economy and drive down prices in the equities market. Chinese premier Wen Jibao, in his annual speech to the National People's Congress, changed projections for the nation's economic growth to 7.5 percent for 2012. This is the third time that number has been revised downward and would represent a significant slowdown after the nation grew at 9.4 percent last year and 10.2 percent in 2010. This news was joined Tuesday by European Union data showing that the economies of eurozone nations contracted by 0.3 percent in the fourth quarter of 2011.
The declining economies in Europe and China might actually ease one other pressure on economic growth that could affect the equities market. Crude oil prices have been on the rise for months, and slowed economic growth could result in reduced demand and lower prices for crude. However, there's still concerns about the political situation in Iran that could continue to keep crude prices relatively high. Regardless, with a variety of economic dark clouds gathering on the horizon, many believe that even a modest recovery in the United States won't be enough to power a continued Bull Market in the equities market.
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